HMO-W INC. v. SSM Health Care System
2000 WI 46, 234 Wis. 2d 707, 611 N.W.2d 250 (2000)
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Rule of Law:
Wisconsin law prohibits the application of minority discounts when determining the fair value of dissenting shares in an appraisal proceeding, as such discounts undermine the protective purpose of dissenters' rights statutes. However, courts may consider evidence of corporate unfair dealing within the appraisal proceeding if it directly impacts the valuation of those shares.
Facts:
- In 1983, SSM Health Care System (SSM) and other health care providers formed HMO-Wisconsin (HMO-W) as a provider-owned health care system, where all shareholders, including SSM, assumed minority status.
- By the early 1990s, HMO-W explored merging with another health care system and eventually proposed a joint venture with United Wisconsin Services (United), after having previously considered and eliminated DeanCare Health Plan.
- Before seeking shareholder approval for the proposed merger with United, HMO-W retained Valuation Research Corporation (VR) to value its net assets, and VR prepared a report estimating the company's value between $16.5 and $18 million, which HMO-W accepted.
- HMO-W's board of directors voted to approve the merger with United and submitted it to a shareholder vote, providing proxy materials that included the VR report and informed shareholders of their statutory right to dissent.
- SSM and the Neillsville Clinic, who together owned approximately 20% of HMO-W's shares, voted against the proposed merger with United; however, the merger was approved.
- Both SSM and the Neillsville Clinic then perfected a demand for the payment of their dissenting shares pursuant to Wis. Stat. § 180.1323.
- HMO-W subsequently abandoned the VR report, hired a new appraiser who valued its assets at approximately $7.4 million, and based on this lower valuation, sent SSM a check for almost $1.5 million for SSM's shares.
- SSM disputed HMO-W's valuation, informing the company that SSM's fair value calculation for its shares was approximately $4.7 million.
Procedural Posture:
- Pursuant to Wis. Stat. § 180.1330(1), HMO-W initiated a special proceeding in the circuit court (trial court) to determine the fair value of the dissenting shares.
- SSM asserted in the circuit court that HMO-W was estopped from claiming a company value lower than the $16.5 to $18 million value it had initially represented to shareholders.
- The circuit court accepted HMO-W's expert's valuation of $10,544,000, but then applied a 30% minority discount to SSM's dissenting shares, concluding it was legally required to do so, and ordered SSM and the Neillsville Clinic to repay with interest the amount by which HMO-W's initial payment exceeded the court's fair value determination.
- SSM filed a post-decision motion requesting the court to clarify its consideration of SSM's estoppel argument, which the circuit court denied, affirming its prior decision.
- SSM appealed the circuit court's decision to the Court of Appeals of Wisconsin.
- The Court of Appeals affirmed in part and reversed in part, remanding the case for a fair value determination without the application of a minority discount, holding that Wisconsin statutes do not allow such discounts in dissenters' rights cases; however, it affirmed the circuit court's determination as to HMO-W's net asset value, finding SSM failed to prove harm in reliance on the VR report.
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Issue:
1. Does Wisconsin Statute § 180.1301(4) permit the application of a minority discount when determining the fair value of a dissenter's shares in an appraisal proceeding? 2. May a court, when making a fair value determination of a dissenter's shares, consider evidence of unfair dealing by the corporation relating to the valuation of those shares?
Opinions:
Majority - Ann Walsh Bradley, J.
No, Wisconsin Statute § 180.1301(4) does not permit the application of a minority discount when determining the fair value of a dissenter's shares in an appraisal proceeding. The court found the statutory language regarding "fair value" ambiguous as to minority discounts and thus looked to the purpose of dissenters' rights statutes, which is to protect minority shareholders from majority oppression by ensuring they receive a fair value for their shares when involuntarily subjected to fundamental corporate changes. Applying a minority discount would penalize minority shareholders for their lack of control and unfairly enrich majority shareholders, effectively allowing a "squeeze-out." Fair value, in this context, refers to the proportionate interest of the minority shares in the going concern of the entire company, not merely a discounted market value of a minority block. The court aligned with a significant number of jurisdictions, including Delaware (citing Cavalier Oil Corp. v. Harnett), and the American Law Institute's Principles of Corporate Governance, all of which reject minority discounts in appraisal cases to maintain equity and the protective purpose of these statutes. Yes, a court, when making a fair value determination of a dissenter's shares, may consider evidence of unfair dealing by the corporation if it directly relates to the value of those shares. While Wisconsin law generally treats appraisal as an exclusive remedy and Delaware typically requires separate actions for claims of fraud or breach of fiduciary duty, the court determined that when allegations of misconduct, such as unfair dealing, are "intertwined with the value of shares subject to appraisal," they are proper subjects for consideration within the appraisal action itself. A court determining fair value must consider "all relevant factors," which can include evidence of unfair dealing affecting the shares' value or for impeaching the credibility of majority shareholders' valuation contentions. The court found that the circuit court had adequately considered SSM's arguments of unfair dealing and estoppel, reviewed all relevant evidence, and determined that HMO-W had not made a material misrepresentation and that the initial VR report contained flaws. The circuit court was not required to accept any single party's valuation and properly relied on its assessment of witness credibility and evidence.
Analysis:
This decision significantly clarifies the valuation standards for dissenting shareholders in Wisconsin, bringing the state in line with a national consensus against minority discounts in appraisal proceedings. By ensuring that minority shareholders receive the full proportionate value of their interest in the company, the court reinforces the protective intent of dissenters' rights statutes, preventing majority shareholders from financially exploiting forced buyouts. Furthermore, allowing consideration of corporate misconduct within the appraisal process itself streamlines litigation and offers a more comprehensive equitable remedy, though it empowers courts to independently assess corporate valuations rather than being bound by initial representations if they are demonstrably flawed.
